Tears for the Midtiers?

Midtier insurers always have followed the lead of their larger market leaders, but the task is becoming more difficult. Property/casualty underwriting for the midtiers was the subject of a recent TowerGroup report, and Deborah Smallwood, managing director, insurance, for the research and consulting group, pinpointed some concerns. "I worry about these midtier players because we need regional players that are servicing a niche," says Smallwood. "They are competing with big companies that are spending a billion dollars a year on IT."

TowerGroup found the midtier carriers need what the large carriers already have–rules engines, rating engines, and other elaborate systems–but the smaller carriers don't have the resources to build these systems. As for buying from a vendor, Smallwood notes the midtiers can't find a complete solution.

Software vendors haven't caught up with the market's needs, according to Smallwood. Insurers also are finding underwriting systems require a huge investment to get the content in place. "The big carriers will buy the tools they need, and they have so many business analysts, they can populate the content," she says.

The midmarket tends to follow large companies in terms of technology, but it doesn't have the resources or the skill sets necessary, and it doesn't have the amount of staff available for such major projects. "Most midtier carriers don't have architects, and the bigger carriers have so many of them they are tripping over each other," says Smallwood.

One aspect of the problem is carriers have been using policy administration systems as a vehicle to automate underwriting. "The policy administration vendors have been pushing this for years–to take policy production systems that were made for producing policies and booking premium and move them forward to get people to put underwriting rules on them and some straight-through processing," explains Smallwood.

That's been one of the solutions in the marketplace, but TowerGroup's study indicated the big companies are finding policy administration systems aren't as effective from an underwriting perspective. "They need sophisticated rules engines and workflows that a policy administration system doesn't have," says Smallwood. "They also need to plug in predictive analytics and underwriting workstations to handle straight-through processing and exceptions."

The alternatives for midtier carriers are limited, Smallwood points out. By sticking with their policy administration system to perform underwriting, the midtiers will not be able to keep up with what the big players are doing. "I think some vendors are trying to pull [underwriting systems] together, but it doesn't happen overnight," says Smallwood.

The vendors are going to build and sell only what they perceive the market is buying, remarks Smallwood, while carriers are saying: It's not out there; if it were, we'd buy it. There is a gap in terms of the perception of what is needed, she asserts. "It's going to take vendors a while to build and populate [new underwriting systems]," she says. "The carriers haven't been asking for them, and they often don't even know how to ask for them."

The good news for carriers is if they are able to get a rules engine for underwriting and they have multiple lines, they should be able to use the rules engine across multiple lines of business. "You should be able to use it in underwriting, billing, and claims, not only lines of business," says Smallwood. "Service-oriented architecture can provide that flexibility."

Though often discussed in hypothetical terms, Smallwood believes SOA is a reality. "The midtier guys, in order to compete in the future in terms of product innovation and time to market, are going to need all this," she says. "A policy administration system is not going to give them the flexibility."

There is a paradigm shift under way, Smallwood observes. "The pieces are starting to line up," she says. "With SOA and Web services, this really is the first time I've seen technology be an enabler for some of the issues we've been talking about for the last 15 years."